IAASB Main Agenda (September 2004) Page 2004·1949 …

[Pages:22]Agenda Item IAASB Main Agenda (September 2004) Page 2004?1949 10-C

INTERNATIONAL STANDARD ON AUDITING 800

THE AUDITOR'S REPORT ON SPECIAL PURPOSE AUDIT ENGAGEMENTS

(This Standard is effective)

PROPOSED

INTERNATIONAL STANDARD ON AUDITING 800 (REVISED)

THE INDEPENDENT'S AUDITOR'S REPORT ON HISTORICAL FINANCIAL INFORMATION OTHER THAN A COMPLETE

SET OF GENERAL PURPOSE FINANCIAL STATEMENTS

(Effective for reports issued on or after [insert date])

CONTENTS

Introduction .................................................................................................... Definitions .................................................................................................... Reports on Other Historical Financial Information Other than Summarized Financial Information

General Considerations ............................................................................ Applicable Financial Reporting Framework ............................................ The Auditor's Report on Other Historical Financial Information ............ Reports on Financial Statements Prepared in Accordance with a Comprehensive Basis of Accounting Other than International Accounting Standards or National Standards..................................................................... Reports on a Component of Financial Statements........................................... Reports on Compliance with Contractual Agreements.................................... Reports on Summarized Financial Statements ................................................ Appendix 1: Examples of Reports on Financial Statements Prepared in

Accordance with a Comprehensive Basis of Accounting Other than International Accounting Standards or National Standards Appendix 2: Examples of Reports on Components of Financial Statements Appendix 3: Examples of Reports on Compliance Appendix 4: Examples of Reports on Summarized Financial Statements

Paragraph 1-29 10

311-814 15-23 24-37

9-11 12-17 18-20 21-25

International Standard on Auditing (ISA) 800 (Revised), "The Auditor's Report on Special Purpose Audit EngagementsThe Auditor's Report on Historical Financial Information Other Than a Complete Set of General Purpose Financial Statements" should be read in the context of the "Preface to the International Standards on Quality Control, Auditing, Assurance and Related Services," which sets out the application and authority of ISAs.

Prepared by: Alta Prinsloo (August 2004)

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Introduction

1. The purpose of this International Standard on Auditing (ISA) is to establish standards and provide guidance in connection with special purpose audit engagements including:

? Financial statements prepared in accordance with a comprehensive basis of accounting other than International Accounting Standards or national standards;

? Specified accounts, elements of accounts, or items in a financial statement (hereafter referred to as reports on a component of financial statements);

? Compliance with contractual agreements; and

? Summarized financial statements.

This ISA does not apply to review, agreed-upon procedures or compilation engagements.

The purpose of this International Standard on Auditing (ISA) is to establish standards and guidance on the independent auditor's report issued as a result of an audit of historical financial information other than a complete set of general purpose financial statements (refer to hereinafter as "other historical financial information"). The independent auditor's report on a complete set of general purpose financial statements is dealt with in ISA 700 (Revised), "The Independent Auditor's Report on a Complete Set of General Purpose Financial Statements."

2. This ISA deals with the auditor's report only. Standards and guidance on the performance of the audit of other historical financial information are dealt with in the Code of Ethics for Professional Accountants issued by the International Federation of Accounts and the other ISAs, with the exception of ISA 700.

3. This ISA does not deal with auditor's reports on the financial information of a component that is to be included in group financial statements.

4. Other historical financial information includes financial information prepared in accordance with a financial reporting framework designed for a general purpose (other than a complete set of general purpose financial statements, which are dealt with in ISA 700) or a financial reporting framework designed for a special purpose, and summarized financial information.

5. Examples of other historical financial information prepared in accordance with a financial reporting framework designed for a special purpose (hereinafter referred to as "other historical financial information prepared for a special purpose") include financial information prepared in accordance with:

? A tax basis of accounting;

? The cash receipts and disbursements basis of accounting;

? The financial reporting provisions of a government regulatory agency; and

? The provisions of a contractual agreement, such as bond indentures or loan agreements.

6. Other historical financial information can be presented as:

(a) A complete set of financial statements prepared in accordance with a financial reporting framework designed for a special purpose; or

(b) A single financial statement, or specific elements, accounts or items of a financial statement, prepared in accordance with a financial reporting framework designed for a general purpose or a financial reporting framework designed for a special purpose.

7. Examples of a single financial statement include the following:

? Balance sheet.

? Statement of income or statement of operations.

? Statement of retained earnings.

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? Statement of cash flows.

? Statement of changes in owners' equity.

? Statement of assets and liabilities that does not include owners' equity accounts.

? Statement of revenue and expenses.

? Summary of operations.

? Statement of operations by product lines.

? Statement of cash receipts and disbursements.

8. Examples of specific elements, accounts or items in a financial statement include the following:

? Accounts receivable, inventory, provision for doubtful debts, the liability for accrued benefits of a private pension plan, the recorded value of identified intangible assets, or the liability for "incurred but not reported" claims in an insurance portfolio.

? A schedule of externally managed assets and income of a private pension plan.

? A schedule of net tangible assets.

? A schedule of disbursements in relation to a lease property.

? A schedule of profit participation or employee bonuses.

? A schedule of share price movements and of average share price.

9. An engagement to express an opinion on compliance with the provisions of a contractual agreement that do not deal with the preparation of historical financial information is performed in accordance with International Standard on Assurance Engagements (ISAE) 3000, "Assurance Engagements Other Than the Audit or Review of Historical Financial Information."

2.The auditor should review and assess the conclusions drawn from the audit evidence obtained during the special purpose audit engagement as the basis for an expression of opinion. The report should contain a clear written expression of opinion. [Now paragraphs 24 and 26.]

Definitions

10. The following terms have the meanings attributed below:

(a) "Applicable financial reporting framework" means a financial reporting framework adopted by the responsible party in preparing the other historical financial information. Where legal and regulatory requirements supplement the applicable financial reporting framework with additional requirements relating to the preparation and presentation of the other historical financial information, the applicable financial reporting framework, for the purposes of applying the ISAs, encompasses both the financial reporting framework and such additional requirements, provided they do not conflict with the applicable financial reporting framework.

(b) "Engagement circumstances" means the terms of the engagement, the characteristics of the other historical financial information, the applicable financial reporting framework, the needs of the intended users, relevant characteristics of the responsible party and its environment, and other matters, for example events, transactions, conditions and practices, that may have a significant effect on the engagement.

(c) "Financial reporting framework" means a set of criteria applied in the preparation of other historical financial information;

(d) "Financial reporting framework designed for a special purpose" means a financial reporting framework that is designed to meet the financial information needs of specific intended users.

(e) "Intended user" means the person, persons or class of persons for whom the auditor prepares the report on the other historical financial information. The responsible party can be one of the intended users, but not the only one.

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(f) "Responsible party" means the person or persons who are responsible for the other historical financial information. The responsible party may or may not be the party who engages the auditor.

Reports on Other Historical Financial Information Other Than Summarized Financial Information1

General Considerations

3.The nature, timing and extent of work to be performed in a special purpose audit engagement will vary with the circumstances. Before undertaking a special purpose audit engagement, the auditor should ensure there is agreement with the client as to the exact nature of the engagement and the form and content of the report to be issued. [ISA 210, "Terms of Audit Engagements."]

11. An engagement to report on other historical financial information may be undertaken as a separate engagement or in conjunction with an audit of the entity's complete set of general purpose financial statements. However, this type of engagement does not result in a report on those financial statements. Where the client intends to publish the other historical financial information together with the complete set of general purpose financial statements, the auditor advises the client that the complete set of general purpose financial statements and its auditor's report should be clearly separated from the other historical financial information and its auditor's report. For example, other historical financial information prepared in accordance with a tax basis of accounting may be published with an entity's complete set of general purpose financial statements.

12. When deciding whether to accept an engagement to express an audit opinion on a single financial statement, or a specific element, account or item of a financial statement, the auditor should consider whether the auditor will be able to obtain sufficient appropriate audit evidence to support the opinion, taking account of the inter-relationship that may exist between various elements, accounts or items within a financial statement or between interrelated financial statements. For example, in an audit of revenue, the auditor considers the inter-relationship between revenue, receivables and inventory. This will include consideration of the pervasive effect of the internal control environment, particularly with respect to the completeness assertion.

13. When the auditor is engaged to express an opinion on an element, account or item in a financial statement and a modified auditor's report has been issued on that financial statement, the auditor should consider the effect that this may have on the auditor's report on the element, account or item constituting the other historical financial information.

(a) When an adverse opinion or a disclaimer of opinion has been expressed on a financial statement, the auditor reports on the other historical financial information only if it is not so extensive as to constitute a major portion of that financial statement. In addition, the auditor makes the intended users aware of this fact in an emphasis of matter paragraph in the auditor's report on the other historical financial information.

(b) Where a qualified opinion on a financial statement, or an emphasis of matter paragraph in the auditor's report on that financial statement, affects the purpose for which the other historical financial information has been prepared, the auditor makes the intended users aware of this fact in an emphasis of matter paragraph in the auditor's report on the other historical financial information.

14. The auditor should consider materiality in relation to the other historical financial information. For example, a particular account balance may often provide a smaller base against which to measure materiality compared with the entire financial statement. Consequently, the auditor's examination may often be more extensive than if the same financial information were to be examined in connection with a report on the entire financial statement. Where the auditor is expressing an opinion on a single financial statement, as opposed to a complete set of financial statements, the auditor also considers the

1 Standards and guidance on reports on summarized financial information are dealt with in paragraphs ... to ...

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effect on materiality, since the materiality appropriate for a complete set of financial statements may not be appropriate for a single financial statement.

Applicable Financial Reporting Framework

15. The auditor's report on other historical financial information should identify the financial reporting framework and, in the case of other historical financial information prepared for a special purpose, the purpose for which the financial information has been prepared and the intended users; or should refer to a note in the other historical financial information that contains this information.

4.16.

In planning the audit work, the auditor will need a clear understanding of the purpose for which the information being reported on is to be used, and who is likely to use it. To avoid the possibility of the auditor's report being used for purposes for which it was not intended, the auditor may wish to indicate in the report the purpose for which the report is prepared and any restrictions on its distribution and use. [Text below and paragraphs 15 and 35-37.]

The auditor obtains an understanding of the applicable financial reporting framework. In the case of other historical financial information prepared for a special purpose, the auditor also obtains an understanding of the purpose for which the financial information has been prepared and of the intended users. The auditor confirms this understanding in writing, preferably in an engagement letter.

17. ISA 200 (Revised), "Objective and General Principles Governing an Audit of Financial Statements" requires the auditor to determine whether the applicable financial reporting framework is acceptable. In this regard, the auditor considers the following:

(a) In the case of other historical financial information prepared for a special purpose, the steps taken by the responsible party to determine that the applicable financial reporting framework is appropriate to the needs of the intended users.

(b) In the case of other historical financial information prepared in accordance with the provisions of a contractual agreement, whether any significant interpretations of the agreement have been made by the responsible party in preparing the financial information. An interpretation is significant when adoption of another reasonable interpretation would have produced a material difference in the other historical financial information.

(c) Whether the applicable financial reporting framework exhibits the following characteristics of suitable criteria:

(i) Relevance: relevant criteria contribute to conclusions that assist decision-making by the intended users.

(ii) Completeness: criteria are sufficiently complete when relevant factors that could affect the conclusions in the context of the engagement circumstances are not omitted. Complete criteria include, where relevant, benchmarks for presentation and disclosure.

(iii) Reliability: reliable criteria allow reasonably consistent evaluation or measurement of the other historical financial information including, where relevant, presentation and disclosure, when used in similar circumstances by similarly qualified practitioners.

(iv) Neutrality: neutral criteria contribute to conclusions that are free from bias.

(v) Understandability: understandable criteria contribute to conclusions that are clear, comprehensive, and not subject to significantly different interpretations.

(d) Whether the financial reporting framework is acceptable in the engagement circumstances.

18. Depending on the engagement circumstances, the set of criteria constituting the applicable financial reporting framework may encompass not only the accounting standards promulgated by means of law or regulation or by recognized standards setting bodies, or the provisions of a contractual agreement, but may also encompass:

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? The impact of the legal environment, including statutes, regulations and court decisions in relation to accounting matters;

? Published views on emerging accounting issues and accounting interpretations of varying authority issued by standard setting, professional or regulatory bodies;

? Industry practices widely recognized and prevalent; and

? Accounting literature.

19. The relative importance of each characteristic of suitable criteria to a particular engagement is a matter of professional judgment. Suitable criteria are context-sensitive, i.e. to the engagement circumstances. For example, a financial reporting framework applied in the preparation of other historical financial information prepared for a special purpose may not be neutral, but still acceptable in the engagement circumstances. In this case, the auditor determines that the financial reporting framework does not lead to conclusions that are unduly biased.

20. Criteria (financial reporting provisions) established by a government regulatory agency for the preparation of other historical financial information that meets the needs of that agency are presumed to be acceptable for that purpose.

21. As discussed in ISA 200 (Revised), paragraph 41, financial reporting frameworks established by organizations that are authorized or recognized to promulgate standards to be used by certain types of entities are presumed to be acceptable for general purpose financial statements prepared by such entities, provided the organizations follow an established process involving deliberation and exposure of proposals for comment to a wide range of stakeholders. When these frameworks are adopted for the preparation of other historical financial information prepared for a special purpose, the auditor considers the acceptability thereof in the light of the engagement circumstances.

22. Partial application of either a financial reporting framework designed for a general purpose or an established financial reporting framework designed for a special purpose does not constitute compliance with that financial reporting framework. Consequently, there is a presumption that the partial application of either a financial reporting framework designed for a general purpose or an established financial reporting framework designed for a special purpose does not constitute an acceptable financial reporting framework. However, there may be circumstances where the special needs of specific intended users may justify the use of such a financial reporting framework. Hence, the auditor considers whether the reasons for adopting such a financial reporting framework are acceptable in the engagement circumstances. For example, the auditor may consider a single financial statement prepared in accordance with the relevant requirements of a financial reporting framework designed for a general purpose to be acceptable in the engagement circumstances.

23. As discussed in ISA 210, "Terms of Audit Engagements," paragraph 13, without an acceptable financial reporting framework, the responsible party does not have an appropriate basis for preparing the other historical financial information and the auditor does not have suitable criteria for evaluating the financial information.

The Auditor's Report on Other Historical Financial Information

24. The auditor's report should contain a clear expression of the auditor's opinion on the other historical financial information.

25. As discussed in ISA 200 (Revised), the objective of an audit of other historical financial information is to enable the auditor to express an opinion whether the financial information is prepared, in all material respects, in accordance with the applicable financial reporting framework. The terms used to express the audit opinion ordinarily are "give a true and fair view" or "are presented fairly, in all material respects," (which are equivalent terms) in accordance with the applicable financial reporting framework. However, different terms, such as "prepared, in all material respects," in accordance with the applicable financial reporting framework, may be required by national law or regulation, by contractual agreement, or may be established practice in a particular jurisdiction. The auditor considers whether the terms used to express the audit opinion properly convey that reasonable assurance, as described in ISA 200, paragraphs 8-11, has been obtained.

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Forming an Opinion on the Other Historical Financial Information

26. The auditor should evaluate the conclusions drawn from the audit evidence obtained as the basis for an opinion on the other historical financial information.

27. When forming an opinion on the other historical financial information, the auditor evaluates whether, based on the audit evidence obtained, there is reasonable assurance that the financial information is free from material misstatement. This involves concluding whether sufficient appropriate audit evidence has been obtained to reduce to an acceptably low level the risk of material misstatement in the other historical financial information2 and evaluating the effects of uncorrected misstatements identified.3

28. In forming an opinion on the other historical financial information, the auditor evaluates whether the financial information has been prepared in accordance with the specific requirements of the applicable financial reporting framework.

29. In particular, the auditor considers whether:

(a) The accounting policies selected and applied are appropriate in the engagement circumstances;

(b) The significant accounting estimates, if any, made by the responsible party are reasonable in the engagement circumstances;

(c) The other historical financial information discloses the applicable financial reporting framework, the significant accounting policies applied and the responsible party's significant interpretations, if any, of regulatory, legal or contractual agreement requirements. However, in jurisdictions where the applicable financial reporting framework is legally codified, a reference to the applicable financial reporting framework may suffice;

(d) The other historical financial information provides sufficient disclosures in the engagement circumstances to enable the intended users to understand the effect of material transactions and events on the financial information;

(e) The terminology in, including the title of, the other historical financial information is appropriate in the engagement circumstances; and

(f) The other historical financial information presented is relevant, reliable, comparable and understandable in the engagement circumstances.

30. The evaluation of whether the other historical financial information has been prepared in accordance with the specific requirements of the applicable financial reporting framework is a matter of professional judgment. The auditor reflects on whether the other historical financial information, after any adjustments made by the responsible party as a result of the audit process, may be misleading in the engagement circumstances.

31. If the auditor encounters circumstances that leads the auditor to conclude that the other historical financial information is misleading, the auditor discusses the matter with the responsible party and considers the effect on the auditor's report, which will depend on how the responsible party addresses the matter in the other historical financial information and how the applicable financial reporting framework deals with these circumstances (see ISA 701, "Modifications to the Independent Auditor's Report").

Elements of the Auditor's Report

5.32.

The auditor's report on a special purpose audit engagement, except for a report on summarized financial statements, should include the following basic elements, ordinarily in the following layout:

2 See ISA 330, "The Auditor's Procedures in Response to Assessed Risks." 3 See ISA 320, "Audit Materiality."

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(a) Title;.14

(b) Addressee;.

(c) Opening or iIntroductory paragraph that

(i)Identification of identifies the other historical financial information audited and, in the case of other historical financial information prepared for a special purpose, the purpose for which the financial information has been prepared and the intended users; or that refers to a note in the financial information containing this information; and. The introductory paragraph should state that the other historical financial information has been audited.

(ii)A statement of the responsibility of the entity's management and the responsibility of the auditor;

(d) Identification of the responsible party and a description of the responsible party's responsibility for:

(i) In the case of other historical financial information prepared for a special purpose, determining that the applicable financial reporting framework is acceptable in the light of the other engagement circumstances, including the needs of the intended users;

(ii) Preparing and presenting the other historical financial information in accordance with the applicable financial reporting framework;

(iii) Designing, implementing and maintaining internal control relevant to the preparation and presentation of the other historical financial information that is free from material misstatement, whether due to fraud or error;

(iv) Selecting and applying accounting policies that are appropriate in the engagement circumstances; and

(v) Making accounting estimates, if any, that are reasonable in the engagement circumstances.

(d)A scope paragraph (describing the nature of an audit)

(i)The reference to the ISAs applicable to special purpose audit engagements or relevant national standards or practices; and

(ii)A description of the work the auditor performed;

(e) A statement that the responsibility of the auditor is to express an opinion on the other historical financial information based on the audit.

(f) A description of the scope of the audit by stating that the audit was conducted in accordance with ISAs applicable in the engagement circumstances, and an explanation that those standards require that the auditor comply with the applicable ethical requirements and that the auditor plan and perform the audit to obtain reasonable assurance whether the other historical financial information is free from material misstatement.

(g) A description of the audit, stating that:

1 It may be appropriate to use the term "Independent Auditor" in the title to distinguish the auditor's report from reports that might be issued by others, such as officers of the entity, or from the reports of other auditors who may not have to abide by the same ethical requirements as the independent auditor. 4 A title indicating the report is the report of an independent auditor, for example "Independent Auditor's Report," affirms that the auditor has met all of the ethical requirements, including that of independence and, therefore, distinguishes the auditor's report from reports issued by others.

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